AUD/USD: Dual resilience and RBA's tightening bias

AUD/USD resilience amid greenback surge

Last week, the AUD/USD closed 0.85% higher, continuing to swim against the current of a surging US dollar. Contributing to the AUD/USD's resilience were higher commodity prices following additional incremental stimulus in China and a local employment report showing that the Australian labour market remains robust despite the RBA's 400 basis points in rate increases.

CFTC positioning data, highlighted in our previous report, indicate that bearish sentiment toward the AUD/USD persists at extreme levels. The speculative net short position was only modestly reduced last week to -79.5k from -83.5k the prior week.

Speculative accounts - a pressure test

At this juncture, the speculative accounts that amassed short positions during the decline from the July .6899 high have not been significantly pressured. However, some late entrants who added or initiated short positions in the AUD/USD over the past four weeks near .6400 may face tests from this week's event-rich data calendar, which includes:

• Central bank meetings for the Fed, the BoE, the BoJ, Norges Bank, the Riksbank, and the SNB
• CPI inflation data in the UK and Japan
• Global flash PMIs
• The release of the RBA Minutes from the September meeting (previewed below).

RBA meeting minutes

Date: Tuesday, 19 September at 11:30 am AEST

The Minutes from the Reserve Bank's meeting in September are scheduled for release on Tuesday, 19 September, at 11:30 am AEST. In its September meeting, the RBA maintained its cash rate at 4.10% for a third consecutive month.

The RBA's decision to keep rates steady offers additional time to assess the impact of a cumulative 400 basis points in rate hikes and evidence that a sustainable equilibrium between supply and demand is taking shape. Reflecting greater confidence in the inflation outlook and signs of economic moderation, the RBA retained its tightening bias but softened noticeably from earlier stances.

"Some further tightening of monetary policy may be necessary to ensure that inflation returns to target within a reasonable timeframe."

The Board Meeting Minutes are expected to reiterate the sentiments outlined above. They will be scrutinised closely for insights into what factors might prompt the RBA to act on its tightening bias and what factors could lead the RBA to extend its rate pause for a fourth consecutive month.

RBA cash rate chart

AUD/USD technical analysis

As we have consistently highlighted since 21 August, and reiterated last week, provided the AUD/USD remains above the weekly uptrend support at .6360/50 (originating from the March 2020 low of .5509), the currency pair has the potential to explore higher levels. Initial targets lie at .6520c, with scope to extend towards .6600c and eventually the 200-day moving average at .6700c.

Be aware that if the .6360/50 support level is breached on a closing basis, downside support is scant until the .6200/.6170 range, which marked the low in October 2022.

While we don’t dispute the various factors contributing to selling interest in the AUD/USD, historical trends suggest that when positioning and sentiment skew too heavily in one direction, the stage is often set for a significant position washout. A case in point is the nearly ten-figure rally from the October 2022 low of .6170.

AUD/USD weekly chart

AUD/USD daily chart

• _{TradingView: the figures stated are as of September 18, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}